Rehman Ali
The gas sector in Pakistan, historically stable until 2013, has been grappling with the urgent and significant challenge of circular debt. The understanding of the reasons behind the accumulation of circular debt has become crucial in devising strategies to mitigate this issue, ultimately paving the way for sustained stability and growth within the sector.
The circular debt in Pakistan’s gas sector can be understood through a straightforward equation. The total cost of delivering gas should ideally equal the wellhead price of gas plus transmission and distribution losses, the Sui companies’ margin, and the Unaccounted for Gas (UfG), which includes theft and leakages. When the cost of gas delivery increases due to any of the aforementioned factors without a corresponding rise in revenue, the differential accumulates as payables, thus forming what is known as gas sector circular debt.
This debt is reflected on the balance sheets of upstream exploration and production companies such as Oil & Gas Development Company Limited (OGDCL) and Pakistan Petroleum Limited (PPL), which supply gas to Sui distribution companies but do not receive payments. Similarly, Pakistan State Oil (PSO) procures Regasified Liquefied Natural Gas (RLNG) from Qatar under long-term agreements but does not receive corresponding revenues from Sui distribution companies. This scenario inflates PSO’s receivables, undermining its capacity to grow, expand, and meet obligations to foreign suppliers of RLNG.
The Build-up of Gas Sector Circular Debt Post-2013:
The accumulation of circular debt in Pakistan’s gas sector post-2013 can be primarily attributed to two factors:
No Gas Price Increase (2013-2017): During this period, gas prices were not allowed to increase despite rising production costs, leading to unfunded subsidies as revenue from gas sales was inadequate to cover the growing costs.
Introduction of LNG as Petrol: Liquefied Natural Gas (LNG) was classified as petrol instead of being included in the gas basket to determine a weighted average cost of gas. This decision led to a structural inability to fully recover the cost of RLNG, which is significantly more expensive than locally produced gas when diverted to residential and industrial consumers.
The inability to adjust gas prices in line with increasing production costs and the misclassification of LNG have fueled significant financial imbalances, exacerbated by the perceived lack of a structured method to recover the full cost of RLNG.
Strategies to Address Gas Sector Circular Debt:
To effectively tackle the issue of circular debt in the gas sector and its affiliated problems, several crucial steps need to be taken:
Fully Implement the WACOG Law: Enforcing this legislation will ensure a balanced pricing mechanism that reflects the true cost of gas, including RLNG. Implementing WACOG would entail averaging the higher cost of imported LNG with the lower cost of locally produced gas, resulting in fairer prices for consumers and reducing the financial strain on gas distribution companies.
Eliminate Cross Subsidies to the Fertilizer Sector: Cross subsidies distort market dynamics and create financial imbalances. By eliminating heavy cross subsidies to the fertilizer sector, the government can reduce the financial burden on the gas sector and provide targeted subsidies directly to farmers if necessary.
Remove Cross Subsidy Burden from Industry: Similar to the fertilizer sector, industrial consumers often cross subsidize domestic consumers, distorting the pricing regime in the gas sector. Removing this cross-subsidy burden would optimize gas use for economic growth and reduce the financial strain on gas distribution companies.
Promote the Use of LPG: Encouraging the use of Liquefied Petroleum Gas (LPG) as an alternative to natural gas, particularly in domestic consumption, can reduce strain on the gas distribution network and diversify energy sources, enhancing energy security.
Restructure the Gas Distribution Business: The monopoly of two Sui companies in the gas distribution business in Pakistan can be addressed by separating the distribution business from the sales business, facilitating competition, improving efficiency, and attracting private investment.
Offer Better Rates to Local E&P Companies: Addressing the significant disparity between the rates paid for imported RLNG and locally produced gas by offering competitive rates to local E&P companies can incentivize domestic production, reduce reliance on imported LNG, and enhance energy security.
Develop Gas Storage Facilities: Developing gas storage facilities is essential for buffering against price volatility and ensuring a stable supply, thereby enhancing energy security.
The accumulation of circular debt in Pakistan’s gas sector is a complex issue that requires a multifaceted approach to resolve. By fully implementing the WACOG law, eliminating cross subsidies, promoting the use of LPG, restructuring the gas distribution business, offering better rates to local E&P companies, and developing gas storage facilities, Pakistan can effectively address the root causes of circular debt. These measures will not only help in controlling and eventually eliminating gas sector circular debt but also promote a more sustainable, efficient, and resilient gas sector, paving the way for a brighter future.
It is crucial to acknowledge that implementing these strategies entails strong political will, regulatory reforms, and most importantly, collaboration between the public and private sectors. However, the long-term benefits of a stable and thriving gas sector far outweigh the challenges, making it a critical priority for Pakistan’s energy security and economic growth.
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